Moody’s affirms A3 rating on Birmingham Airport Authority, AL’s Airport Revenue Bonds; Outlook is Stable
Rating Action: Moody’s affirms A3 rating on Birmingham Airport Authority, AL’s Airport Revenue Bonds; outlook is stable
23 Aug 2019
Approximately $176 million of debt affected
New York, August 23, 2019 — Moody’s Investors Service has affirmed the A3 rating on Birmingham Airport Authority, AL’s (Authority) outstanding airport revenue bonds totaling approximately $176 million as of June 30, 2018. The outlook is stable.
The A3 rating reflects the authority’s stable competitive position within the Birmingham-Hoover AL combined statistical area (CSA) that will provide a baseline level of demand for air travel, significant competition from Atlanta Hartsfield-Jackson International Airport (ATL), a relatively weaker service area than similarly sized airports, and recent strong enplanement growth that supports modestly improving financial metrics. The authority’s primary airport, the Birmingham-Shuttlesworth International Airport (airport or BHM), is the largest airport in the state of Alabama in terms of total enplanements and is price competitive with Huntsville-Madison County Airport Authority, AL (HSV, A3 stable), the second largest airport in Alabama, which is about 100 miles away. However, ATL (operated by the Atlanta (City of) GA Airport Enterprise, Aa3 stable) offers a much higher number of direct flights and is about 150 miles away from downtown Birmingham, resulting in low utilization of 1.0x in fiscal 2018, well below the industry median of 1.9x in fiscal 2017 and even below the small hub median of 1.2x. While the local economy is reasonably diversified and represents the largest metro area in the state, it trails its southern peers in educational attainment, per capita income and population growth which all are positively correlated with longer-term demand for air travel and would support a higher airport utilization.
The rating positively considers the accelerating enplanement growth at the airport over the last couple fiscal years. Enplanements increased to 1.53 million in fiscal 2019, up 8.8% versus the previous fiscal year which is on par with the growth rate of small hub airports over the last twelve months ending June 30, 2019. Total enplanements remain below the airport’s pre-recession peak of 1.63 million in fiscal 2008 and the airport has experienced six years of enplanement declines and two years with drops over seven percent in the last eleven fiscal years, demonstrating higher than average volatility.
The A3 rating also takes into account the authority’s solid financial position but also considers its relatively elevated leverage and high exposure to demand risk as a small hub airport with a compensatory rate-making methodology in its airline use and lease agreement. Leverage as measured by adjusted debt per origination and destination enplaned passenger (adjusted debt per O&D enplaned passenger) of $152 in fiscal 2018 compares unfavorably to rated peers in the A-rating category as well as other small hub airports. Leverage is positioned to improve due to the amortizing debt service profile and limited capital spending program that will not require the issuance of additional debt. The debt service coverage ratio as calculated on Moody’s net revenue basis (DSCR) has been consistently adequate in the 1.2-1.4x range over the last five fiscal years and exceeded 1.6x based on unaudited fiscal 2019 information as enplanement growth increased almost 9%. While the authority was able to capitalize on the increased passenger throughput and improve margins, the large increase highlights the potential volatility of DSCRs with a compensatory rate-making methodology. In a sensitivity where enplanements revert to 1.4 million in fiscal 2021, which represents an 11% drop from budgeted fiscal 2020 enplanements, Moody’s estimates the authority’s DSCR to be around 1.3x assuming fiscal 2020 budgeted operating expenses of $29 million.
The rating additionally considers Moody’s expectation that the authority’s will retain strong liquidity as measured by days cash on hand, which grew to over 1,000 days in fiscal 2019 based on preliminary financial results, from 875 days in fiscal 2018. The liquidity buffer protects the authority from sudden declines in passenger throughput as a compensatory airport and allows for needed projects to be funded on a cash basis and avoid future leverage.
The stable outlook reflects Moody’s expectation of solid future financial performance as debt continues to amortize and the authority controls expenses to maintain a Moody’s net revenue DSCR around 1.5x on average.
FACTORS THAT COULD LEAD TO AN UPGRADE
– Sustained growth in service area economy that results in enplanement trends outpacing similarly sized and rated peers
– Sustained DSCRs above 1.75x on a Moody’s net revenue basis
– Leverage below $100 adjusted debt per O&D enplaned passenger FACTORS THAT COULD LEAD TO A DOWNGRADE
– Significant decline in enplanements
– Sustained declines in DSCR below 1.3x
– Liquidity below 300 days cash on hand
Airport revenue bonds are secured by a pledge of net revenues of the authority. The authority covenants to maintain rates to cover debt service by at least 1.25x, inclusive of transfers from the capital improvement fund up to 25% of the aggregate amount required to be deposited in the bond fund for such fiscal year. The debt service reserve fund is funded at the lesser of 125% of average annual debt service, maximum annual debt service, or 10% of principal. Additional bonds secured by the net revenues of the authority may be issued subject to the certification of an independent accountant that the rate covenant has been satisfied in the most recent fiscal year and a report of an airport consultant showing the rate covenant will be satisfied over the next five fiscal years or in the case that bonds will be issued to fund additional facilities, three fiscal years after the additional facilities are expected to be completed.
The authority was incorporated on June 6, 1986 as a nonprofit corporation under the provisions of the Code of Alabama. The authority is governed by a seven member board of directors who are nominated by the mayor and elected by the city council of the mayor of Birmingham.
The city of Birmingham owns BHM. Pursuant to a lease assignment and operating agreement, the city transferred to the authority custody, control and management of the airport for a term that currently expires September 15, 2045, subject to certain conditions contained in the agreement.
BHM is a small hub airport located five miles northeast of downtown Birmingham. The airport has two runways and one terminal building which opened in 2013 with three concourses. The airport offers commercial air service to 19 destinations from five airlines.
The principal methodology used in these ratings was Publicly Managed Airports and Related Issuers published in March 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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